Dividend Changes, Cash Flow Predictability, and Signaling of Future Cash Flows
Amy Chun-Chia Chang
San Francisco State University; University of Houston
University of Houston - Department of Finance
Texas A&M University - Department of Accounting
March 9, 2006
AFA 2007 Chicago Meetings Paper
We present fresh evidence on the validity of the dividend signaling hypothesis (DSH), by using a new testing approach. Using a simple dividend signaling model, we derive three empirically identifiable drivers of the marginal net benefit of signaling: cash flow predictability, market-to-book ratio, and past equity returns. Our empirical tests support the DSH. There is a significantly greater association between current dividend changes and future earnings performance for firms with low cash flow predictability, low market-to-book ratio, and low past equity returns. We also present evidence that the marginal signaling benefits at the firm-level are time-varying, increasing (decreasing) in booms (recessions) and in periods of high (low) aggregate stock market performance.
Keywords: Dividend signaling, Cash flow uncertainty, Market-to-book ratio, Time-varying information content
JEL Classification: G35, D82, G30working papers series
Date posted: March 13, 2006
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